Cross rates Suppose that S(S/DM)=50 a i.e. S1=2 DM ● and that s(Y/DM)=50 ie.DM=￥50 ● What must the$/￥ cross rate be? S DM sInce × ￥DM￥ S1 DM1 S1 × →S($/?=.01or$1=?00 DM2?0?00 McGraw-Hilylrwoin 4-15 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-15 Cross Rates ⚫ Suppose that S($/DM) = .50 ◼ i.e. $1 = 2 DM ⚫ and that S(¥/DM) = 50 ◼ i.e. DM1 = ¥50 ⚫ What must the $/¥ cross rate be? ($ / ? .01or $1 ?00 ?00 $1 ?0 1 2 $1 , ¥ $ ¥ $ since = = = = S DM DM DM DM
Triangular arbitrage Suppose we observe these Barclays anks postin Credit lyonnais these exchange S(￥/$)=120 rates S(￡/$)=1.50 First calculate the ￥ ￡ Implied cross Credit agricole rates to see if an S(￥)=85 arbitrage exists McGraw-Hilylrwoin 4-16 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-16 Triangular Arbitrage $ ¥ £ Credit Lyonnais S(£/$)=1.50 Credit Agricole S(¥/£)=85 Barclays S(¥/$)=120 Suppose we observe these banks posting these exchange rates. First calculate the implied cross rates to see if an arbitrage exists